In the ever-expanding global economy, nothing about suppliers or distributors can be taken for granted. As illustrated by the numerous high-profile recalls that have occurred, manufacturers outsourcing to foreign countries must maintain quality control in their supply chains.
According to the Consumer Product Safety Commission, many products recalled in the United States due to safety concerns were manufactured in China or other low-wage countries. Recent recalls have involved toys, drywall, toothpaste, pet food, cribs, tires and electric tools.
Unfortunately, the savings from low wages are eroded by the costs involved when something goes wrong.
The benefits of sourcing with foreign companies can obviously be significant. But there are also substantial potential risks, including:
- Violations of product safety statutes and regulations.
- Cultural and language obstacles.
- Theft of intellectual property.
- Political upheaval and economic stability.
- Public disclosure under the Sarbanes-Oxley Act.
- Damage to a company’s reputation.
“Quality fade,” which happens when a supplier begins shipping satisfactory products but cuts corners on subsequent orders.
Product liability insurance can help cover some of the losses due to a recall, but policies typically have deductibles and limits on reimbursable costs. In addition, if a defect is deemed to be the result of a “deliberate act,” including knowledge of substandard overseas manufacturing, the insurer may refuse to pay.
Minimize Your Risks
Don’t wait for a crisis to show the flaws in your company’s supply chain. Whether you source offshore or domestically, there are proactive steps that can help mitigate the risks. Here are six questions to ask about your outsourced supply chain:
1. Does your company conduct in-depth due diligence of the operations of offshore suppliers, as well as their back-up systems?
Not every supplier in the world interprets quality standards the same way or follows International Organization for Standardization (ISO) guidelines and other globally recognized certifications. Conduct background checks, review trade references and examine the source’s business history. Subcontractors should have the same quality controls as your company.
2. Have you investigated the origin of your products’ parts?
Quality risks don’t come simply from finished products imported from one manufacturer in a single country. For example, a large percentage of Chinese outsourcing is done for Japanese and Korean firms, and many of those products end up as components or finished goods sold in the United States.
3. Does your company hold foreign partners accountable?
Set up site inspections of supply chain partners and review their quality control systems. They should provide written quality-control guarantees. However, even with such assurances, government regulators and courts typically hold U.S. companies liable for ensuring that their foreign-made products meet American safety standards. Many businesses have learned after faulty products have led to recalls or lawsuits that their foreign partners may not have insurance. Plus, legal recourse against foreign partners can be extremely difficult.
4. Does your company have reasonable goals when it comes to cost reduction?
Cost-effectiveness involves accomplishing objectives in ways that keep costs down without reducing quality. Perform cost modeling using offshore wages and other factors to get a solid idea of realistic prices in the country where you outsource. Factor in hidden costs. If prices are too low, there’s a chance of a supply chain hazard or risk such as product counterfeiting.
5. Has your company clearly explained its quality assurance procedures?
Foreign partners must understand relevant safety requirements. So, it’s critical to provide them with detailed product specifications in both their native language and in English. If possible, also use illustrations.
6. Does your company have a reputable testing laboratory in the United States or abroad that regularly monitors its outsourced products?
It’s not uncommon for an offshore source to meet the original product specs at first; then subsequent batches may start to contain low-quality and sometimes dangerous parts or ingredients. The most effective way to help avoid quality fade is to have quality engineers from your company oversee the testing and ensure the laboratory is independent.
Testing should occur at several points. Even if the original parts pass inspection, the manufacturer could run out of parts and purchase similar, but not identical, replacements. End products should be tested randomly or in a statistically significant way. Keep records of quality control tests.
The main thrust of these steps is to elevate your suppliers’ standards and practices and continually monitor their production and quality assurance. This is likely to add to your operating costs and could lead to increased prices. But consumers are generally willing to pay a little more to guarantee safety.
If your business competes primarily on price, offshoring can help it become a low-cost producer. But cutting corners on quality can be costly over the long-run. Manufacturers need to take proactive control of their supply chains and make the investments required to ensure safety and quality. Contact your professional advisor to help protect your company against product recalls and quality-related lawsuits.
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